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Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities

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Author Info

  • David Eagle

    (Eastern Washington University)

Abstract

Pareto-efficient consumption in a pure-exchange, one good economy varies over states of nature with respect to only two factors: real aggregate supply and individual utility shocks. One’s optimal contract receipts vary with respect to only these two factors and the ratio of one’s endowment to real aggregate supply. How one’s Pareto-efficient consumption varies with real aggregate supply depends solely on how one’s relative risk aversion compares to the average. Complete markets can be approximately achieved by four contracts dealing with these factors. This has implications concerning central banking, efficient insurance contract design, and a possible new financial innovation.

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File URL: http://128.118.178.162/eps/fin/papers/0501/0501009.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0501009.

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Length: 42 pages
Date of creation: 15 Jan 2005
Date of revision:
Handle: RePEc:wpa:wuwpfi:0501009

Note: Type of Document - pdf; pages: 42. Paper has policy implications concerning monetary policy and goals, insurance contract design, and optimal inflation indexing
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Web page: http://128.118.178.162

Related research

Keywords: complete markets; inflation indexing; nominal-income targeting; inflation targeting; price-level targeting; monetary policy;

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References

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  1. Alan D. Viard, 1993. "The welfare gain from the introduction of indexed bonds," Proceedings, Federal Reserve Bank of Cleveland, pages 612-635.
  2. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
  3. David Eagle & Dale Domian, 2005. "Quasi-Real Indexing-- The Pareto-Efficient Solution to Inflation Indexing," Finance 0509017, EconWPA.
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Citations

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Cited by:
  1. David Eagle, 2005. "Multiple Critiques of Woodford’s Model of a Cashless Economy," Macroeconomics 0504028, EconWPA.
  2. David Eagle, 2005. "Pareto Efficiency vs. the Ad Hoc Standard Monetary Objective An Analysis of Inflation Targeting," Macroeconomics 0512020, EconWPA.
  3. Eagle, David M. & Christensen, Lars, 2012. "Two Equations on the Pareto-Efficient Sharing of Real GDP Risk," MPRA Paper 41051, University Library of Munich, Germany.
  4. David Eagle, 2005. "The Inflation Dynamics of Pegging Interest Rates," Macroeconomics 0502029, EconWPA.
  5. David Eagle, 2005. "The Pareto-Efficient Relativity of Relative Risk Aversion," Microeconomics 0509004, EconWPA.

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